Taught By

Gael Giraud

Economiste en chef à l'Agence Française de Développement

David Claessen

Maitre de conférences à l'ENS

Alain Grandjean

Docteur en économie de l'environnement, co-fondateur de Carbone 4

Transcript

Hello and welcome! In this session we’re going to talk about the pricing of carbon. It is, by far, the most significant measure for accelerating the energy transition. It is indispensable for steering consumer choice toward products and services less dependent on carbon. It is indispensable for steering industries toward low-carbon processes. In certain cases, it also makes it possible to generate financial resources for the transition. To explain all this, we’re going to mention four important points. First, why a price needs to be set on carbon. Second, how this can be done. Third, what lessons be drawn from the carbon market in place in Europe since 2005. And finally, how can effective carbon pricing become standard. To avoid a warming of over two degrees by the end of the century, human-generated CO2 emissions need to be sharply reduced. If we want to achieve this rapid, drastic reduction, emitting CO2 into the atmosphere must cost polluters money, and it must cost enough to dissuade them from emitting. By the same token, corporations that provide solutions, or consumers who avoid emitting CO2, need to be rewarded. So, the idea is to modify the rules of the economic game to give an advantage to those who emit less carbon and likewise, to make emitting activities costlier. Producers of fossil fuels will thus be pushed to shift their business model toward the production of low-carbon energy. Industries will be encouraged to review their production processes to be more efficient in terms of energy and less dependent on fossil fuels. They will also do more research & development in this direction. As for consumers, they should be nudged toward low-carbon consumption by the available products on offer and the pricing structure. Here we’re talking about the pricing of CO2, but these mechanisms can be extended to other greenhouse gases, like methane, or fluorinated gases, which are also present in industrial and agricultural production processes. We’ll now turn to the question of how to price carbon. Before speaking about carbon pricing in the narrowest sense, first, we’re going to mention some other tools used to give carbon a cost, as you can see in this graph. The first family of tools, are subsidies. Whether they’re for the production or the consumption of fossil fuels, they in effect send a negative price signal. They make emitting products less costly. As you can see here, in 2014, governments spent around $500 billion on subsidies for fossil fuels, and the subsidies have been increasing since 2009. Of course, we ought to be reducing them, and it’s possible while neutralising the negative effects on the poorest populations, since governments can redistribute the money it saves by reducing subsidies. It is also possible and desirable to redirect them toward low-carbon solutions instead of directing them toward fossil fuels. Now let’s move on to the second family of tools: standards and regulations. The CO2 emissions of a given product or service can be limited by law. The tool of industrial standards is useful in two cases. When buyers themselves can’t measure the carbon impact of what they’re buying, and, secondly, when the application of a carbon tax alone would make the product too expensive for the consumer. That’s the case, for example, with cars and housing. In Europe, the standards that manufacturers should meet have sharply reduced automotive sector emissions, even if scandals have shown that the government also needs to have the means to monitor the application of these laws quite strictly. And these types of standards should be expanded to sea and air transport, for example, even if it’s politically and administratively difficult. Now let’s turn to the third family of tools: taxes. The emissions generated by a product, including transport, can be taxed in the form of a price paid to the government per tonne of CO2 emitted. A well-built tax should grow over time to let the economy gradually adjust. The French tax system has this for fuels. As of 2016, the tax is €22 per tonne, with the goal of increasing it to €56 in 2020 and to €100 in 2030. It also involves fuels like gas. Sweden has taxed carbon since 1991, with a powerful effect observed on carbon reduction in the housing stock. In this case, taxed corporations must be able to receive government aid for conversion. Depending on the tax rules, which can vary between countries, the tax can either be paid into the country’s general budget, or be earmarked for investments in making the economy less carbon-dependent. It’s a choice that’s primarily political. In Europe, a quota system was set up in 2005. As you can see on this map, this quota system currently exists in several regions, cities, or countries in the world. In California, in China, in Japan, in Mexico. The quota system is one of the most commonly used tools in the world today. All in all, 40 countries now price, or plan to price, carbon, either through quotas or taxes. Around 12% of emissions worldwide are covered today by a tax or a market. It’s a start, and of course it’s still far from sufficient. How does this quota system work? A regulator is needed who can set, every year, a maximum amount of greenhouse gas emissions for a given industrial site. And this amount decreases over time. So, the corporations that are subject to this mechanism should hold at all times emissions quotas or emissions permits that correspond to this authorisation. If they emit more than they are authorised to, they must buy extra permits on the market, or pay a high fine which is, in practice, a strong deterrent. Conversely, those who emit less than their quotas can sell them on this market. The European quota system, called EUETS, currently covers around 12,000 industrial sites and 45% of European greenhouse gas emissions. It involves the most intensive greenhouse-gas emitting industries: the steel industry, the paper, cement, chemical and electricity industries, for example. But, unfortunately this market is currently rather ineffective. The price per tonne of CO2 has fluctuated since 2012 between €5 and €10 per tonne. That’s not enough to really push industry leaders to invest in reducing their emissions. It’s not even sufficient to make them use less carbon-intensive means when alternatives already exist. To take an example, the price isn’t high enough to replace carbon with other, less carbon-intensive electricity production sources that nevertheless exist. The first reason for this overly low price, is the excess of quota permits initially allocated by the regulator. The other reason is to do with the international competition that certain European industries are up against. In the case of steel, for example, the carbon constraint on steel made in Europe adds to its already high price, compared to steel produced in China. Production is cheaper there, but also more carbon-intensive, because the energy used is based on carbon. This industry in Europe has received excessive free quotas, which amounts to a kind of subsidy to help it remain competitive. But these excessive credits, as a whole, drive down the price of quotas in circulation and make the European system only weakly effective. Carbon pricing was not really addressed in the Paris Agreement. There is just one small paragraph about it. But... to date 74 countries and over 1,000 companies have formed a coalition to foster dialogue among public and private decision-makers on carbon pricing. France, Germany, Mexico, Canada, Chile, Morocco, and even Ethiopia are part of this coalition, which is called the Carbon Pricing Leadership Coalition, and was officially launched at the opening of the COP 21 in 2015 in Paris. Its goal is to make carbon pricing cover 25% of emissions worldwide in 2020 and 50% in 2030. The hard thing about setting up carbon pricing is that it redistributes the cards of the economic game among industrial sectors. It also entails redistribution among households, and countries at different levels of development. Carbon pricing should be socially acceptable to succeed. In countries in the South, the instruments used should make it possible to steer development towards low-carbon alternatives. In 2016 we recommended that a commission of economists recognised worldwide set a price corridor by region, in line with the two-degree warming goal and the goals of North-South transfers. This corridor would not give prescriptive values but rather values that can serve as a signal, as a marker, for countries that want to instate carbon-pricing mechanisms. On the European market, for example, the target price of carbon could and should be between €60 and €80 per tonne starting in 2030. And with that we’d be in line with the objectives of the Paris Agreement. So we hope that the Carbon Pricing Leadership Coalition can quickly make carbon pricing widespread. Thanks for your attention!

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